I reckon the price now looks right for these 2 FTSE 100 stocks

Harvey Jones picks out two FTSE 100 (INDEXFTSE: UKX) bargains that haven’t fully recovered from last autumn’s sell-off.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Nobody wants to overpay for a stock, and nor should they. Shares trading at high valuations can be risky, because profits have to rise rapidly to meet inflated expectations, leaving the stock price vulnerable to even a small setback.

Price is right

Valuation measures such as the price/earnings ratio (P/E), price/earnings growth (PEG) or price-to-sales (P/S) ratio aren’t the only measures you need to examine, but are worth checking to see if you are bagging a potential bargain.

Some of the best bargains can be found among stocks whose share prices have taken a beating. One of these is construction equipment rental specialist Ashtead Group (LSE: AHT), whose stock plunged by a third in the second half of last year, although it’s revived in recent weeks.

PEG-ged back

The group has heavy US exposure, generating around 85% of its earnings from the States, and was hit hard by China trade war fears and the impact of US Federal Reserve rate hikes. In mid-November, its forward P/E multiple slumped to just 11.5 times, with a sub-1 PEG reading of 0.4.

That P/E number is even lower today at just 9.6 times forecast earnings, although the PEG reading has climbed to 0.6. Ashtead still looks a bargain on both counts, and although its P/S ratio of 2.2 is relatively high, it’s in line with the industry average.

Earnings growth

Ashtead boasts healthy historic earnings growth, with five years of double-digit increases ranging from 22% to 48%. Another 36% is expected in the year to 30 April, and although it slows after that to 16% and 7%, I’m still impressed.

Management is confident and revenues are rising at almost 20% a year. The yield is a lowly 1.5%, although that’s partly down to strong share price growth (119% in three years) and management has increased the payout by 34% over the last five years.

Smurfit for purpose

Packaging group Smurfit Kappa Group (LSE: SKG) also lost around a third of its value between summer and last October, but has also started to recover. One concern was that the group was running up large debts to fund its acquisition-fuelled growth. Investors are also worried about over supply in the market, with companies such as DS Smith, Mondi and Hong Kong-based Nine Dragons Paper all looking to boost capacity.

Smurfit’s shares now trade at 15.17 times earnings, against an average of 17.84 times for its sector. That’s well below its five-year high of 22.13, but above its low of 8.62. A P/S ratio of 0.74 isn’t too demanding.

Attractive package

The stock currently yields a modest 3.1%, but management policy has been progressive, as has increased its payout by nearly 40% in total over the past five years. A return on capital employed (ROCE) of 21.1% is another positive.

As Royston Wild notes, the corrugated packaging market has strong growth prospects due to e-commerce shopping growth. Smurfit has just signed an unsecured €1.35bn revolving credit facility that should reduce finance costs, extend the term of its debt facilities, and increase the flexibility of its capital structure. However, earnings growth looks set to flatten in 2019 and 2020. Of the two, Ashtead would be my preferred pick.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »